Antiquated Retirement Advice for an Apathetic America
Uncharacteristically dark at 33,000 feet as my laptop battery died, only the moon is visible from my airplane window. As I sit to handwrite my article for this week, I see the juxtaposition between the rudimentary (pen and paper) and the extraordinary (space exploration where we landed on the moon), and I realize my profession is one of the last great disciplines still in the dark ages…
Remember when America came from behind to win the space race by beating Russia to the moon? Outside of China over their 3,000+ year history, America – as comparatively young as we are – has crushed innovation in the modern era. The electric lightbulb, airplane, photo film, electric traffic light, assembly lines, nylon, microwave, UPC bar codes, personal computer, video games, electronic spreadsheets, lasers, disposable diapers, frozen food, credit cards, nuclear bomb, space shuttle, atom smasher, radiocarbon dating, email, National Science Foundation Network (NSFNET)/the internet, google, wi-fi, digital cameras, virtual reality, iPods, human genome mapping, magnetic resonance imaging, cell phones, smart phones, social media Facebook/YouTube/Twitter, GPS, 3D printers, Fitbit, swallow-able smart pills and even the post-it note – all originated from American inventors.
While nearly every facet of our daily life has been upgraded through modern technology, unfortunately, the opposite is true in my world of finance – where America’s most widely used way to prepare for retirement has been unchanged for nearly four decades! And this ‘primary’ retirement account happened by accident – it was not designed nor intended to be our principal retirement vehicle as it was written as a tax dodge for highly compensated executives on top of their corporate pension plan (Revenue Act of 1978). Uniquely utilized for the first time by a benefits consultant in 1981, this new plan provided employees a way to get a current tax break on their earnings that they earmarked for retirement while enticing them to take part by offering a small employer match.
The 401(k) changed everything back in 1981 and the change stopped there. Gobbled up immediately by corporate America as a much cheaper employer expense than the old defined benefit pension plan – where the risk and responsibility was born 100% by the employer – we quickly and irreversibly moved forever to the defined contribution plan, where the risk and responsibility is born 100% by you, the employee. We have a lot of 401(k) cousins now, like the 403(b), the 457, the SIMPLE, the SEP, and the IRA but they are all pre-tax retirement accounts.
While it was sold to America as a ‘portable’ retirement plan that would go with you if you changed jobs (the company pension didn’t), where you could choose your investments (translation – no guarantees and all the risk is on you), the real undeniable attraction was lowering your tax bill now to save for your future retirement. It was a no-brainer, America was hooked. Fast forward to 2019…we still are. But why?
The things that made the 401(k) make sense in 1981 are nowhere to be found now. Top tax rates of 70%, very low federal debt of $980 billion, and Baby Boomers that were only 16 to 34 years of age all caused pre-tax wealth building to make common sense…then.
But now, with federal debt of $22 Trillion, the looming retirement of 70% of the Baby Boomers en masse, and the lowest tax rates since Reagan and FDR, why would we choose to defer paying the tax now? Why would we not leverage these historically low tax rates, likely never to be seen again? Why would we trade known low rates now for the unknown future rates that mathematically need to go up substantially? Why are Americans still being advised to maximize these pre-tax retirement accounts? Why aren’t these questions being asked?
I’ve asked. The consensus answer – it may not be the ideal retirement plan, but it is all most Americans have access to and using it is better than nothing. Huh? We demand a better smartphone immediately, but we tolerate a sub-par 1981 happened-by-accident retirement plan because most Americans do not have access to anything better than what they can get through their employer?…
Reject that. Seek what is better not merely convenient. Seriously question pre-tax wealth building beyond the employer match in 2019 and go further by considering maximizing your leverage of these historically low tax rates now by repositioning your pre-tax retirement balance – a taxed forever account – to an after-tax, tax free account.
We are Americans, the most innovative people of modern time, and we cannot afford to be apathetic about building our retirement wealth, especially in 2019.
Ms. Walser’s article was featured on Fox Business – check it out here: The retirement questions you should be asking
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